General Mills-Pillsbury Deal Includes Culture and History

By DAVID BARBOZA

Published: July 18, 2000

MINNEAPOLIS, July 17—
They grew up side by side on the banks of the Mississippi River, two 19th-century milling companies that competed head to head and made this city the flour capital of the world.

Their decades-old signs still face each other across the river in symbolic combat --''Gold Medal Flour,'' from General Mills, on the west bank, and ''Pillsbury's Best'' on the east. Today, though, General Mills and Pillsbury said they are uniting to create a food giant with more than $12 billion in annual sales.

The initial announcement came from Diageo, the British conglomerate, which acquired Pillsbury more than a decade ago. Diageo said early today that it had agreed to sell Pillsbury to General Mills in a $10.5 billion deal, forming the fourth largest food company in the world. The merger would bring together such well-known brands as Cheerios, Wheaties, Haagen Dazs, Yoplait yogurt, Hamburger Helper, Jolly Green Giant vegetables and Pillsbury bakery items, though not all these products will remain within the new company's stable.

The planned merger comes during a frenzy of big food company combinations, in which food makers are trying to bolster their growth prospects through acquisitions and global power plays.

General Mills and Pillsbury now say they believe that Betty Crocker and the Pillsbury Doughboy are a good fit and that marketing and distributing their products together will yield huge benefits. The companies also say they know each other well, and their cultures are quite similar, which should make it a friendly merger.

Though many here worry about the job cuts that are sure to follow, others are pleased that two companies that grew up together on the Mississippi will remain in Minneapolis under the General Mills name.

''I like the fact that Pillsbury is being acquired by General Mills,'' said Sharon Sayles Belton, the mayor of Minneapolis. ''They have a history of strong ties to the community. And I think General Mills is going to grow. Short term there may be some job losses, but long term there'll be growth.''

Another reason the concern here is muted is that ownership of Pillsbury returns to Minneapolis after more than a decade in London, where the company was controlled by Diageo.

''These companies and their milling stories are really the signature of Minnesota,'' said Nina Archabal, director of the Minnesota Historical Society. ''To have these companies joined and governed in Minnesota is a tremendous benefit to our community.''

Indeed, after starting out in the flour milling business, General Mills and Pillsbury took widely divergent paths. They both created premier brands, with Pillsbury staying closer to bakery items and General Mills becoming a dominant player in the cereal business. But they also strayed from their roots.

Pillsbury acquired Burger King in 1967, helping make it into a major player in the fast-food business, before the two companies were eventually acquired by Diageo, which specializes in liquor. General Mills also departed from the flour and cereal business, gaining control over Izod/Lacoste, the retailers Eddie Bauer and Talbots, Parker Brothers games and Red Lobster and Olive Garden restaurants, all of which are now gone.

Only in recent years, after a series of divestitures and spinoffs, has General Mills sharpened its focus on cereal, bakery items and yogurt.

Though the company suffered during a period of competitive price-cutting in the cereal industry in the early 1990's, General Mills has been a strong performer in most of its businesses over the last few years.

The company recently passed Kellogg's as the nation's leading cereal maker, though the two are neck and neck, and its Yoplait and Colombo yogurts give it supremacy in the category. General Mills has also extended its product lines with Frosted Cheerios and Honey Nut Cheerios as well as Go-Gurt, a squeezable tubed yogurt product designed for children.

Company executives have also tried to capitalize on health news to promote their cereals, moving into organic food with the purchase of Small Planet Foods Inc. They are working on creating more convenience and instant foods for the growing number of Americans who are eating on the go.

Because of such innovation, General Mills has largely outperformed other food companies in the last two years. Most are facing slow growth prospects in a mature market with increasing pressure from bigger and bigger retailers. General Mills, meanwhile, has promised double digit profit growth and Wall Street had cheered its plans, at least until today.

Shares of the company fell sharply today because some analysts and investors worry that Pillsbury is going to be a drag on earnings. While the company has a hot food service division and some healthy profits in refrigerated products like Pillsbury dough items and Haagen Dazs, canned vegetables and other frozen items have been a drag.

Some analysts believe General Mills may have felt pressured to make a deal and been forced to pay too heavily for Pillsbury.

''They paid a stiff price for this,'' said Art Cecil, a food industry analyst at T. Rowe Price, which owns a large stake in General Mills. ''I'd rather they not have done it. I thought Mills was a great situation. They had great cash flow, innovative management; it seemed a tidy situation. And now earnings are going to be diluted by a fairly significant amount.''